Budget Constraint: Suppose that there exists two goods in the economy: soybeans (S) and textiles (T) and their prices are given by PS and PT , respectively.
(a) Suppose that the nominal prices are PS = 5 and PT = 2. What is the relative price?
(b) Now suppose that a farmer can produce 20 units of soybeans. Draw his budget constraint in terms of S and T. What is the slope of the budget constraint and how does it relate to the relative price?
(c) The price of soybeans falls to $4 per unit. What is the new relative price? Draw the farmers new budget constraint in terms of S and T. Is the farmer better or worse o than before?